Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): Full (100% of the regular position size) speculative short positions in crude oil are justified from the risk to reward point of view stop loss $45.63 at and $30.22 as the initial target price.
As we’re right after the U.S. elections and still before the results, the markets are volatile, including the USD Index and crude oil. No wonder – the markets try to estimate the elections' outcome, and the odds keep changing quickly.
Consequently, the price moves currently taking place shouldn’t be necessarily taken seriously, as their nature might be temporary just as the underlying uncertainty is.
Yesterday, in my gold analysis, I commented that a corrective move lower would not be surprising at all. I also indicated that such a move would only be temporary and not likely to last more than several days.
That’s precisely what we saw. The USD Index has indeed moved lower, almost touching the previously broken red resistance line. Yes, it rallied back up, but in today’s pre-market trading, it declined once again. Given the current political uncertainty, this is a relatively normal post-breakout behavior. The critical point here is that the USDX didn’t invalidate the short-term, let alone the medium-term breakout, which means that, as I indicated yesterday, these moves are not a game-changer, but rather, a relatively normal uncertainty-based phenomenon.
As the USD Index recently moved inversely with crude oil, the above seems to have caused the black gold to move higher.
Still, let’s keep in mind that even if we take today’s pre-market price moves into account, crude oil still erased less than 61.8% of the preceding decline. This means that – technically – this is just a correction and not a new rally. That is not necessarily a big deal, mostly since what we’ve told you about the decline earlier remain up-to-date:
First of all, crude oil stopped rallying after correcting approximately 61.8% of the previous 2020 decline, which means that it was quite likely a real top instead of a fake one that will be broken shortly.
Second, the initial decline was followed by a zigzag, which is a classic corrective pattern. Since the preceding move lower was to the downside, the end of the correction insinuates another decline.
Third, the Stochastic indicator is on a sell signal.
Finally, it’s all similar to what we’ve witnessed in Q1 2020, not just the breakdown in crude oil, but the fact that it had first corrected slightly above the 61.8% of the preceding decline and that stocks were forming a double-top pattern.
Of course, we’ll be aware of the final point (stock’s double top) only after they decline further. However, the shape of the price moves (lower part of the above chart) is already similar.
Furthermore, the Covid-19 cases are soaring once again as well. Even though the fear of the unknown is not present this time, the scale of the phenomenon is much greater, and thus, the emotional reaction is also getting more serious. The charts above reflect that perfectly. Just as it was the case in January and February, crude oil is the first to show weakness, but it’s definitely not the last to do so.
To summarize, for the upcoming weeks, the outlook for crude oil remains bearish.
As always, we’ll keep you, our subscribers well informed.
Trading position (short-term; our opinion; levels for crude oil’s continuous futures contract): Full (100% of the regular position size) speculative short positions in crude oil are justified from the risk to reward point of view stop loss $45.63 at and $30.22 as the initial target price.
In the future contracts that are more distant than the current contract, we think adding the premium (the difference between the July and other contracts) to both: stop-loss and initial target prices is justified.
Thank you.
Przemyslaw Radomski, CFA
Editor-in-chief
